Every major music label will also make hundreds of millions of dollars on Spotify’s IPO, and they will not share a penny of that with Artists either, despite having received their shares as a bonus for delivering Artists’ music to Spotify.Spotify did not eclipse Rhapsody and other competitors by being better, there is little difference between On-Demand services.

Spotify achieved its impressive growth by giving music away. Daniel Ek got in bed with the major labels in return for the right to be the first licensed On-Demand music service to offer a free tier. YouTube also benefitted tremendously by offering free On-Demand music, but its licenses were ‘accidental’ as it was not originally intended as a music service. It is Spotify’s massive free tier (which like YouTube pays less to artists than subscription-only services like Rhapsody) which raised the ire of Taylor Swift and her handlers.

But Ms. Swift has no intention of keeping her music off Spotify any longer than required to extract an acceptable deal. Comments like, “music should not be free, and my prediction is that individual artists and their labels will someday decide an album’s price point” is just posturing for moral high-ground. Swift knows that she gets paid even for plays on Spotify’s free tier. And she has not (yet) complained about YouTube being free. Nor has Taylor Swift or Scott Borchetta griped about old-fashioned terrestrial radio, which not only plays her music for free to listeners, but also pays her via Borchetta’s label exactly… nothing. And despite selling 1.2 million copies of 1989 in its first week, the savvy duo suffers no delusion that there is a rosy future for CD sales. Most of Taylor Swift’s fans don’t even own CD players, hell I don’t own a CD player. In fact, the scathing Thom York critique of a broken music industry wherein he called Spotify “the last desperate fart of a dying corpse” would be better applied to the CD.

The truth is that Ms. Swift, like Mr. Ek, is a shrewd business person. Taylor & Co are well aware that streaming represents the entire future of music consumption, including her own. And in that future she would like to make more money per stream than Spotify’s free tier pays. She is okay with the royalties Spotify would pay if it dumped 75% of its user base and retained only the paid subscribers.

Mr. Ek in his turn understands that dumping Spotify’s free tier would remove all advantage over rivals like Rhapsody, Rdio, and Beats. Ironically, dumping free users is exactly what would make Spotify a profitable company with long-term value. But reversing user growth now would reduce Spotify’s 2015 IPO valuation by billions, costing Daniel Ek personal hundreds of millions of dollars short-term, so he put his foot down.

We live in a money-driven era. Nobody is surprised by stars like Taylor Swift clawing for extra millions. We’re not even shocked when nerds like Mr. Ek become billionaires. But independent Artists just get confused when two One-Percenters have a public lovers’ quarrel. What Artists need is a more honest music industry. Swift and Ek are likely to get richer regardless of when streaming matures. But how will the new streaming music world play out for the ‘regular’ Artists? Media hype aside, they’ll be just fine too. Here’s what will happen…

All-you-can-eat On-Demand services including Spotify and Apple’s forthcoming ‘iBeats’ will soon be relegated to subscription only. They will charge the current $10/month and will eventually replace downloads completely. CD sales in turn will give way to high-end upgrades of On-Demand services offering FLAC streaming at about $20/month to aficionados. Taylor Swift and every other musician will supply all their music to these services because compensation will be fair.Rhapsody already claims to pay Artists three times what Spotify pays per active user.

Smarter music label executives will get wise to YouTube’s free-ride too. The video streaming juggernaut will be forced to pay comparable rates for comparable services. If they choose to continue offering free On-Demand music, they will need to increase commercial load so dramatically that it will drive many users to the dedicated music subscription services. And if kids want to put up with full video ads pre-rolling every song they play on YouTube that’s fine, because the Artists will be fairly compensated for their work. Should Google manage to ‘out-muscle’ demands of fair payments for YouTube plays through underhanded dealings that reward labels but not Artists (like Spotify’s IPO), then Artists will get wise and run away in droves until Google learns to play fair.

Grown-up music consumers who choose not to pay subscription fees will forego full On-Demand just as they always have with FM radio. But excellent Personalized Radio services like Pandora and Radical will completely replace terrestrial radio (which pays Artists nothing) creating a huge windfall for Artists by compensating them for every track streamed, even on ad-supported services. And ALL music streaming services will see a modest increase in Composer Royalties vis-à-vis Artist Royalties, as the latter is heavily favored in most of today’s deals. Virtually all recorded music will soon be consumed via streaming. This scares many Artists trying to make a living in a quickly-changing music industry. And this is what inspired Taylor Swift to call out Spotify’s poorly-paying free tier – she does not want a bad precedent set.

But armed with straight information Artists will demand transparency from Labels. With transparent deals Artists will see a bigger cut of payouts from On-Demand streams. And with a level playing field between On-Demand services, payments from Spotify and YouTube will be much higher. Finally, as free-riding FM music stations are replaced by Personal Radio services that pay for every stream, todays musicians will be better and better off. The music industry has undergone a turbulent transition to an Internet economy, but as the exciting streaming industry matures musicians will begin to partake of their most lucrative era ever.

7 Comments

Last weeks 12/14/2014 soundscan shows that physical sales where 72.3 % of sales and digital was 27.3 % and year end decline from Jan when it was 51/49. Unless you math challenged putting your music into only digital and online resources is not doing anyone any favors. The public is clearly still buying CD, say because you don’t own a CD player is not market research. BTW next time you’re in Starbucks try to find digital music, you know the CD’s are right by the cash register at every single outlet.

nelson is right about cds. plus, artists of all sorts are selling cds at live shows. we’ve been hearing about the “death of the cd” since 1999 when napster first launched. 15 years later… fact is, people like “stuff.” unless there was a special arrangement made, it’s also false to say that taylor swift gets nothing from terrestrial radio airplay. swifted is listed as a composer on most of her songs and is therefore entitled to some impressive royalties via terrestrial radio airplay.

Let’s look at this from the listener/music fan POV. They have an expectation of FREE radio and music. To a listener, streaming feels like radio and they are used to radio for free. Some will pay. Most won’t. Bottom line is the revenue from subscriptions is only a tiny fraction of the massive $95Billion ad market to reach people on their smartphones. What do people spend more time doing on their smartphones than anything else? Listening to music, mostly streaming music. THAT is the future of the music business. Whether they get it via piracy or a free service monetized by ads, they will get it. The future of the music business is selling audiences to advertisers. http://recode.net/2014/04/24/the-future-of-the-music-industry-selling-audiences-to-advertisers/

Thank you all for your comments. Nelsen, SoundScan is comparing CD sales to Downloads, both dying mediums. Streaming revenuers are growing rapidly as CD sales AND Digital Downloads continue their decline. By all means, keep selling CDs as long as you can, but don’t plan on a rosy future for that revenue stream. Mason, you are correct that Swift receives royalties from US terrestrial radio for composition credits (mostly shared with Max Martin). I am addressing Artists in this post, not Composers. Though I do mention, “And ALL music streaming services will see a modest increase in Composer Royalties vis-à-vis Artist Royalties, as the latter is heavily favored in most of today’s deals” to tip that Composers were not getting screwed by US terrestrial radio (like Artists are) but need to keep their eyes open in our brave new streaming world. Thanks for reading! From the HotSeat, Tom McAlevey, CEO Radical.FM

One quick note about Swifts decision to pull her music from spotify: it was a business decision point blank, no I love my fans bs. Ask yourself, how many records did she sell and how much promo and extra income did she get of this whole I pull down my music from spotify stunt? Its such an easy business case in favor of the decision.

If anything this makes a lot of sense from a business standpoint for Taylor. She and her album has all the right to do whatever they want with their music. Maybe, just maybe, Spotify should consider increasing the pay-per-stream a bit to retain huge artists like Taylor Swift. In the absence of Taylor on Spotify, Ed Sheeran rules it’s charts. Taylor and Ed are very good friends. It could go further downhill for Spotify if they don’t be more lenient towards the artists and their wishes. That being said, I’m a person who believes in music being free.

Adam wouldn’t it be great if everything was free. Seriously, who would be opposed to that? The only question is why should everyone else get paid? That’s the part I just can’t figure out. What are your thoughts Adam?

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